Surface survives Microsoft cuts, but tablet strategy remains muddled

What part, if any, will Nokia have in tablets, analysts ask

As Microsoft announced its largest layoffs in its 39-year history - while saying it would press forward with its in-house Surface analysts contended that the firm still hasn't clearly stated its tablet strategy.

Earlier today, Microsoft said it would cut up to 18,000 jobs, or 14% of its work force, with the bulk of those layoffs coming from streamlining efforts after acquiring much of phone-maker Nokia.

The layoffs begin immediately, but as many as 5,000 will be left on tenterhooks for up to a year before knowing whether their jobs are safe.

Along with the layoffs, Microsoft also signaled an end to its experiment with Android, which powered the Nokia X series of smartphones. Nokia had kicked off the line prior to the deal's completion.

"We plan to shift select Nokia X product designs to become Lumia products running Windows," CEO Satya Nadella said in a message to employees.

Surface, the tablet-one-moment-notebook-the-next hardware that Microsoft debuted two years ago, will survive, the company made clear.

"With a set of changes already implemented earlier this year in these teams, this means there will be limited change for the Surface, Xbox hardware, PPI/meetings or next generation teams," wrote Stephen Elop, the head of Microsoft's device division, in a separate, much longer email to workers.

Nor, apparently, has Microsoft's Surface strategy changed.

"More broadly across the Devices team, we will continue our efforts to bring iconic tablets to market in ways that complement our OEM partners, power the next generation of meetings [and] devices, and thoughtfully expand Windows with new interaction models," Elop said.

While some on Wall Street have urged Microsoft to dump the Surface -- and the Xbox for that matter -- to focus on more profitable services and software, industry analysts contacted by Computerworld today weren't surprised that the tablet/notebook survived the cuts.

"I'm not surprised that Microsoft is keeping Surface," said Patrick Moorhead, principal analyst at Moor Insights & Strategy, in an email today. "While it doesn't fit 100% with 'mobility and cloud,' it's close enough to keep it as it supports them driving their expanded definition of productivity by tying hardware, software and services."

Others agreed.

"No, I didn't think that they'd dump it," echoed Wes Miller of Directions on Microsoft, a Kirkland, Wash. research firm that focuses on the moves of nearby Microsoft. "Some people thought Microsoft would use this opportunity to ax the Surface, but it's a big long-term bet for them. And the Surface Pro 3 sure seems to be a lot more popular than the earlier models."

Microsoft started selling the third-generation Surface Pro 3 -- an Intel processor-powered device that runs Windows 8.1 -- last month, and will finish rolling out the line in two weeks. The Surface Pro 3 starts at $799, but costs $929 with a keyboard, a necessary add-on to fit the notebook replacement role that Microsoft markets.

Two configurations of the Surface Pro 3 went on sale Friday, at prices of $999 and $1,299 sans cover keyboard. (Image: Microsoft.)

Despite Elop's statement that, "We will continue our efforts to bring iconic tablets to market," Microsoft's tablet strategy remains unclear, analysts said.

"I'm still confused about the role devices will play, especially in emerging markets," said Carolina Milanesi, chief of research and head of U.S. business for Kantar WorldPanel Comtech. "We still don't have much clarity on the role of Nokia on the tablet side."

In his email, Elop hinted that Microsoft's smartphone strategy would be to aggressively push into price-sensitive markets to boost the user base and gain market share.

"Is Microsoft hoping that people who buy [low-priced Windows Phones] will at some point buy a PC?" asked Milanesi. That strategy, she added, was risky, as large numbers were unlikely to "graduate" to a PC, or even a tablet running Windows.

The Surface has always been positioned as a premium brand, with premium prices. Will Nokia's role then be to flesh out Microsoft-designed devices on the low end, to "go cheaper and wider," as Milanesi put it?

She wasn't sure, and blamed Microsoft. "I was really hoping to see more concrete steps Microsoft will take in tablets," Milanesi said. "Either Microsoft hasn't explained it, or it hasn't figured this out."

Moorhead and Miller were on Milanesi's side.

"Microsoft was clear that it wanted to complement OEMs versus competing with them, but they gave no details on how they would do that, nor did they give new insight into the demarcation between Surface and Nokia," Moorhead said. "I expect that in the coming months, though."

"It's been a long time since I've heard '2520' uttered by anyone from Microsoft," said Miller, referring to the Lumia 2520, a tablet that runs Windows RT 8.1 launched by Nokia in October 2013. "The role of the 2520 in particular is curious. It's also duplicitous. I wasn't a fan of the original Surface, but I really liked the Lumia 2520. But has Microsoft learned what makes it a better device than the Surface? I don't know. As Microsoft moves forward, using either 'Surface' or a number to brand their devices, the hope I've had is [to know] what Microsoft has gleaned from that hardware."

Miller was pessimistic that a lower-price tablet strategy for emerging markets would work out for Microsoft. "Those markets are so price sensitive. They don't just evolve where people start to save more to go buy a tablet. And they're not loyal to a platform. They tend to buy whatever is cheapest, and good enough, at that moment."

Nor are those kinds of customers a big pool of untapped revenue, Miller argued. "They don't invest in the soft-goods market, they're not investing in apps that aren't free, they're not investing in music," Miller said. "They're not a net gain for the Microsoft ecosystem."

While the frustration on the part of these analysts was clear, the lack of a clearly-defined tablet strategy has a much broader impact than simply confusing outside observers.

"The cuts are the first step in the things that need to be done," said Milanesi. "But we need more clarity about what this means, how everything fits in [with Microsoft's emphasis on] productivity and the enterprise. Reading this today, if I'm a CIO, I'm not going to jump on [Microsoft's tablets] because I don't have a clear picture of the strategy."

The only clarity Microsoft's provided, Milanesi said, was that devices continue to play a role in Redmond, even as Nadella dumped former CEO Steve Ballmer's "devices and services" tag line for his own "mobile-first, cloud-first," as well as his newer "productivity and platforms."

"Will devices continue? Yes. Does it all have to come from Microsoft? Absolutely not," Milanesi said.

"It's a double-edged sword," asserted Miller, of Elop's statement that there would be "limited change" for the Surface. "On one hand, it means they're not backing down. But it also means that they're not going to double down."

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

Read more about tablets in Computerworld's Tablets Topic Center.

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